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International community will continue to support with financial assistance, capacity building

Somalia should focus on strengthening the key building blocks for stability and growth as it recovers from more than two decades of civil war, the IMF says in its first review of the nation’s economy in a generation.

Money transfer office in Mogadishu: Many Somali families rely on remittances, and the economy is highly dollarized (photo: Omar Feisal/Reuters/Corbis)

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In its first regular “health check” of the economy in over 25 years, the IMF noted that the country had made significant progress since it resumed relations with the international community. But Somalia’s situation remains very fragile, and international support will be vital to rebuild institutions and restore normalcy, the report says.

In the following interview, IMF mission chief Rogerio Zandamela discusses the incremental steps Somalia has begun to take toward economic recovery from conflict.

IMF Survey: Could you describe Somalia’s progress since the restoration of its relations with the international community in 2013?

Zandamela: When our team first began working on Somalia in June 2013 after the protracted civil war, we had practically no data about the economy. It took us almost six months to collect some preliminary information to work with, and we then decided to focus on the budget of the federal government. Gradually, we were able to get a better sense of the country’s GDP and other basic macroeconomic data and information.

The country has made incredible progress. We were able to compile and analyze core data to conduct our first “health check” of the Somali economy in 26 years. The IMF has been helping the Somalis set up systems for improving central bank governance, central bank accounting and financial reporting, and the supervision of financial institutions. We’ve also been assisting them with budget preparation, formulating fiscal policy, and developing statistical systems.

The Fund has not been alone in helping Somalia—the African Development Bank, the World Bank, and bilateral donors such as the European Union, Kenya, Norway, Turkey, the United Kingdom, and the United States are extremely active. Given the magnitude of the task in Somalia, no one institution can be expected to manage it singlehandedly.

IMF Survey: Can you paint a picture of the Somali economy today?

Zandamela: Humanitarian and social conditions in Somalia are among the most daunting in the world. Close to 4 million people—nearly a third of the population—are in need of food assistance. Infant mortality is more than one in ten; and life expectancy is about 51 years. Moreover, according to the UNDP, an estimated 73 percent of Somalis live below the poverty line of $2 a day.

That said, economic conditions improved rapidly in 2012-14, with real GDP rising by 3.7 percent during 2014. The recovery was led by growth in livestock and fisheries, and a very active private sector resurgence of the services industry, notably telecommunications, construction, and money transfer services, mainly associated with the return of diaspora Somalis. If security improvements continue, the entrepreneurial private sector will continue to be the most dynamic contributor to economic growth.

For 2015, growth is projected at 2.7 percent.

IMF Survey: What are the country’s most pressing economic priorities?

Zandamela: Building sound institutions and fostering good governance are paramount for restoring the people’s confidence in government. We see this as the biggest economic challenge Somalia faces. And since the quality of those institutions hinges on the quality of the people running them, we regard training and building the capacity of the Somali people as equally essential.

Mobilizing government revenue is another key priority. This is challenging to accomplish in an environment where there has been no tax collection for a quarter of a century. The government will also have to prioritize expenditure, which is a difficult task in a situation where the needs are so great.

The country will have to rely on donor grants for a long time, because it will take time to mobilize revenue. Over time, however, we would like to see domestic revenue become an increasingly large source of funding for infrastructure and the country’s other urgent needs.

As for other urgent areas, there are a number of them. I believe that banks and other financial institutions must be properly licensed, regulated, and supervised. For years, as you know, Somalia has had a financial system that is basically informal. The informal money transfer system known as hawala is widely used. Because Somalia has been cut off from the international financial system, there still is not an effective regulator and supervisor of the financial institutions in the country. The role of the central bank as the sole manager of international reserves should similarly be strengthened.

And finally, Somalia will need currency reform, as the economy is highly dollarized and the vast majority of the national currency in circulation is counterfeit. But a number of technical steps will be needed before the country is ready to re-issue its own currency in a serious way. Issuing a new series of a national currency can help in the process of building the new nation—however, it is important to be patient and first plan and prepare to do it right. A failed currency reform is an expensive venture.

IMF Survey: Somalia is not currently eligible to receive IMF financial assistance since it is in arrears to the institution. Given the fragile state of its economy, how can Somalia possibly repay?

Zandamela: The IMF is for now precluded from providing new loans to Somalia, pending clearance of the country's arrears of about $328 million. But we can advise the authorities on appropriate macroeconomic policies, including in the context of a staff-monitored program, which is a kind of “shadow program” involving a dialogue with the IMF on economic policies but which offers no financing. Clearing the country’s arrears requires the authorities to develop a track record of performance, and that is usually done through such a program. This would pave the way for Somalia, in due course, to obtain debt relief.

IMF Survey: What is your hope for Somalia?

Zandamela: Ordinary Somalis want peace, prosperity, and stability for themselves and for their families. We hope the IMF can make a contribution in our area of expertise to help the Somalis achieve this legitimate wish. Somalia is a country with much potential—they have natural resources, including gas and petroleum, fisheries, and more. Proper management of these natural resources is vital to the country’s success.

To the authorities’ credit, the revenue performance has improved in Somalia—they have almost doubled what they began with in 2013. That tells you that there's potential and they can do much more. But it's very difficult for a country that still has relatively serious issues with security and rule of law.

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